This past Wednesday, the checkered flag waved and the first quarter of 2021 came to a close. Interestingly, it was the iconic Dow Jones Industrial Average (DJINDICES:^DJI) that led the major indexes higher in Q1, with a 7.8% gain.
If you’re wondering why the nearly 125-year-old index outpaced both the broad-based S&P 500 and growth-stock-heavy Nasdaq Composite, look no further than the 30 components that make up the index. The Dow Jones is predominantly comprised of mature (i.e., slow-growing) U.S. multinational companies that would best be described as value stocks. With investors rotating out of growth stocks and into value during parts of the first quarter, the Dow was in perfect position to thrive.
But just because the Dow Jones gained nearly 8% in three months, it doesn’t mean there aren’t still big-time values contained within the index. The following three Dow stocks offer some of the most attractive upside in the second quarter, and beyond.
It’s not often you’ll come across a company that fits the bill as both a growth stock and value stock, but that’s precisely what investors get with cloud-based customer relationship management (CRM) software company salesforce.com (NYSE:CRM).
For those unfamiliar with CRM software, it helps consumer-facing businesses handle tasks such as logging customer information, addressing service issues, overseeing marketing campaigns, and recommending new products to existing clients. Since CRM software is cloud-based, it’s accessible in real-time and designed to improve operating efficiency, margins, and client satisfaction. It’s sort of a no-brainer tool for service industry companies, but is finding the light of day in nontraditional industries and sectors, such as healthcare and finance.
What makes Salesforce so special is its dominance of the CRM space. In the first half of 2020, it controlled almost 20% of the global CRM revenue share, according to International Data Corporation. That was more than triple its next-closest competitor. Establishing itself as the go-to cloud-based CRM software platform means it should have a shot at hitting CEO Marc Benioff’s target of $50 billion in sales by fiscal 2026. For context, Salesforce generated $21.3 billion in sales in fiscal 2021.
Further helping the cause is the company’s pending cash-and-stock deal to acquire Slack Technologies. Slack’s enterprise-based communications platforms should act as a jumping-off point for Salesforce to cross-sell its solutions to small and medium-sized businesses.
With most software-as-a-service stocks valued at a multiple or 20 or more times forward-year sales, Salesforce looks like a no-brainer bargain at a little north of six times its forward-year sales.
Walgreens Boots Alliance
Another one of the best Dow stocks investors can buy right now — even at a 52-week high — is pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA).
Usually, healthcare stocks aren’t adversely impacted by recessions. That’s because we don’t get to choose when we get sick or what ailment(s) we develop. Therefore, drug and device demand remain steady, even during recessions. But this wasn’t the case for Walgreens in 2020, with reduced foot traffic hurting its front-end sales and its clinics.
The good news is that we’re seeing Walgreens’ multistep turnaround beginning to take shape, and it’s being reflected in both the company’s share price and improved operating results.
For instance, Walgreens is on track to reduce its annual operating expenses by over $2 billion by 2022. At the same time, it’s spending aggressively on digitization initiatives. During the fiscal second quarter (ended Feb. 28), Walgreens Boots Alliance saw digitally initiated retail sales rise 78%.
Furthermore, MyWalgreens memberships jumped more than 40% since Dec. 31, 2020, to 56 million. MyWalgreens is a loyalty program that helps the company better understand its customers’ purchasing habits. It’s also a tool that can be used to keep its customers loyal to the brand.
To build on the turnaround campaign, Walgreens is also on track to open 40 of its full-service Village Medical clinics within its stores. The goal is to eventually have up to 700 of these full-service health clinics in its U.S. stores. With more functional clinics, Walgreens should be able to attract repeat customers and easily funnel them to its high-margin pharmacy.
Despite its recent run-up, shares of Walgreens can be scooped up by opportunistic investors for a shade over 10 times forward earnings per share.
A third Dow stock that has the potential to fire on all cylinders in Q2 and beyond is big pharma company Merck (NYSE:MRK).
As noted, pharmaceutical stocks like Merck benefit from the consistency of demand for their brand-name drugs, no matter how well or poorly the U.S. or global economy is performing. In spite of the worst recession in decades, Merck managed to grow sales in 2020 by 4%, excluding the impact of currency changes in foreign markets.
Merck has an extensive portfolio of brand-name therapies, but none is more important than cancer immunotherapy Keytruda. To date, Keytruda has been approved to treat 25 different types or stages of cancer, including advanced melanoma, advanced hepatocellular carcinoma, and both metastatic nonsquamous and squamous non-small cell lung cancer (first-line treatment). Merck has dozens of additional clinical studies in the works examining Keytruda as a monotherapy or combination treatment. After bringing in $14.4 billion in full-year sales in 2020 (up 30% year over year), it looks well on its way to eventually becoming the world’s top-selling drug.
There are, of course, reasons to be excited beyond just Keytruda. For instance, Merck’s animal health division continues to deliver healthy sales growth. Last year, animal health brought in $4.7 billion, or roughly 10% of total sales. Adjusting for currency moves, the livestock and companion animal (dogs and cats) segments saw respective sales growth of 9% and 11%. With pet owners shelling out big bucks to ensure the well-being of their four-legged friends, double-digit percentage companion animal growth is a good bet moving forward.
Investors can buy Merck right now for less than 11 times forward-year earnings per share despite sales growth that’s likely to range between 5% and 8% annually through 2025. That’s a screaming bargain for patient value investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.